Trading Plan

When I was in my 30’s and 40’s, I had longer term investment objectives because I could afford to look to the future.  “We’re in it for the long haul.” is what my broker would say to me if I started to get nervous about a decline in the FTSE.  Nowadays, things are different.

There are different ways of investing; bigger markets, far greater diversity and the cost of investing have fallen dramatically.  Mainly thanks to the internet.

I have therefore started to think of my investment objectives over a much shorter time frame – weeks and months, rather than years. As such, I have come round to the idea of being a ‘trader’ rather than an ‘investor’.  It’s a subtle difference in terminology, but a big difference in mind-set.

However, there is one thing that has not changed.  The need for a plan.  Trading plans require a lot of work and they need to be more detailed than just saying "buy low and sell high". I do not believe that there are any consistently successful traders that do not have a plan.   It is the only way to succeed, whether you trade shares, commodities or foreign exchange. Well-made plans have always been fundamental to the success of anyone who's set out to achieve a goal, from a carpenter to an army general. So in this article I want to tell you a bit about how to set-up your own trading plan so you can walk that path to profit and success. You should also set your boundaries: just how much money are you willing to risk?

Let's start with what a trading plan is not: a trading plan is not some vague instructions scribbled on a piece of paper.  Nor is solely achieved from advice provided by well-worn trading books. The stock market is a treacherous place and going into it with only vague instructions is a quick way to lose money. Trading plans, real trading plans, are seriously thought out pieces of self-examination and a great deal of research into a market. They mirror a trader's personality, guiding him to undertake actions that maximize profit and minimize loss.

So, how are these masterpieces created? First of all, good trading plans are made from the bottom up. The foundation for these plans is made when a trader takes stock of himself: what his personality is what his interests are and what he has as an overall objective.  Goals often define a person and plans are no different. When you're starting to make a trading plan, you should ask yourself this question: what exactly am I hoping to achieve with this plan? Financial security's one answer, but it’s a bit vague and needs something rather more specific. Setting a weekly or a monthly profit and loss margin for yourself would be a good start, then slowly working yourself up to a quarterly or an annual target. Creating goals in this manner give you something to aim for and define a sense of progress for yourself. You must also focus on how much loss are you willing to absorb? Knowing your limits is one of the important parts of making a trading plan and remember not to be too greedy.  Aiming too high is a very good way of becoming disappointed.

Next thing on the agenda is what market and shares you'll be trading in. There's an old adage about getting a job that you enjoy so that it won't feel like work and that holds true here, too.  Choosing a field that you have prior knowledge about or interest in can help you keep focused on the market's progression. That way you won't suddenly find yourself caught by some new trend. We often hear about some traders being fundamentalists and others relying on technical analysis, but personally I have a foot in both camps.  I think that you need to understand the fundamentals and then use technical analysis to decide upon your entry and exit points, but I’m getting ahead of myself and beyond the scope of this article.  Picking shares by performance simplifies the selection process somewhat, although you sometimes have to dig deep to discover the underlying patterns to their progression.  So research is all important, particularly when it comes to shares.  You have to get into the detail, study the books and the papers and the internet for information about your chosen shares.

Finally, you should set-up your trading strategies. Trading strategies reflect your personality. If you're a bit of worrier, then you'll probably be aiming for conservative strategies, the ones that aim for slower profits over a longer period. But if you're the adventurous type who is looking for a short-term gain, buying and selling volatile shares or perhaps trading in currencies would be more fitting for your personality. Remember to try and make your trading plan and overall strategies work with your personality, that way it will be easier to follow. Risk-taking trades would probably be too much mentally for a conservative trader and slow, boring ones would put a risk-taker to sleep, with the same end result of you suddenly becoming careless and potentially losing a lot of money.

Timing is everything.  Experienced traders look for a particular price point to hit where they are most likely to get a profit. They also time their buys to a particular time, knowing when the market has reached a particular limit. Good research should be able to give you this information. Your exit from the market is equally important. The price of shares may continually rise but your plan should indicate where you should start selling it off, even at the loss of potential profit. This is the same for when the price is going down. Your exit strategy outlines how low you want to go before actually selling the stock, even at a loss. It sounds strange to follow your plan while taking a loss, but if you made a good trading plan, it should take the chance of potential loss into the equation.  Nobody ever buys at the bottom and sells at the top.  Take a view, make a decision, act on it and move on.

Well, that's all the space we have available to explain the basics of a trading plan. If you want to know more, there are several good books available on the market and we have listed some examples below.